South Dakota

Asset Protection Planning

Why South Dakota?

Should I Consider a South Dakota Asset Protection Trust as Part of My California Estate Plan?

Sometimes known as the land of “Great Faces, Great Places,” South Dakota can be also called the land of “Great Trusts.” Thanks to decades of court precedent interpreting and cementing its trust laws, South Dakota is a top U.S. jurisdiction for irrevocable asset protection planning. If you’re a Californian looking to put away as a nest egg (+/- at least $1 million in cash, investments, or life insurance) in the event of a potential, future, theoretical rainy day (or blizzard), a South Dakota Domestic Asset Protection Trust may be an excellent piece to your California estate plan, and Attorney Ryan J. Casson, licensed to practice South Dakota law, can help. You do not need to be a South Dakota resident to utilize South Dakota trust law.

  • South Dakota offers one of the most favorable, modern US legal environments for DAPTs, including a brief Statute of Limitations on creditor claims (lookback period of 2 years for preexisting and future creditors, which may be abbreviated to 6 months), the ability to create trusts for a wide variety of assets, Special Purpose Entities (i.e., LLCs), and powerful privacy in trust proceedings. Scroll down on the page for an overview of other potential benefits.

  • A South Dakota DAPT can help in reducing estate tax liabilities. By removing assets from your taxable estate via a “completed gift” DAPT, you may decrease the overall tax burden of, and pass more of your wealth to, your heirs.

  • With correct terms in your DAPT, you can retain certain powers over the assets owned by your DAPT. These powers can affect whether your DAPT is a completed gift or incomplete gift irrevocable trust, and you will need to discuss with your estate planning attorney your tax and other objectives. However, South Dakota law can afford the grantor a degree of control and flexibility over a DAPT, including being a potential discretionary beneficiary, making the calls as to certain administrative decisions, trust protector use, investment choices, and more.

  • There are three types of potential creditors: (1) a lawsuit creditor who has obtained a money judgment, (2) bankruptcy, and (3) your future ex-spouse!  While not guaranteed, in general, a South Dakota DAPT can protect DAPT assets from lawsuit creditors and divorce (exempting DAPT assets from bankruptcy is a bit harder, as the lookback period in bankruptcy is more than 2 years, may be 10 years, and may depend on where the bankruptcy court is located).  This type of planning ought to be one piece of your estate planning puzzle, which works to accomplish objectives besides creditor protection, and undertaken while the coast is clear, not when a creditor is “on the horizon.”  “Severe clear,” a term used by airplane pilots, is what is necessary for maximum, potential protection.  You do not need to be married or have children to create these trusts.  In fact, your children may be discretionary lifetime beneficiaries, which can come in handy in the event of a divorce (well, if they’re in your corner!).

  • To maximize the potential creditor protection that your South Dakota DAPT may afford your DAPT assets, you will need to maintain a link, or nexus, to South Dakota, which you can achieve via designating a South Dakota resident trustee to serve as trustee. There are dozens of professional, experienced South Dakota trust companies and other trustees who can fill this critical role (for an annual fee, of course). If you’re considering this type of planning, you understand that good things take work and aren’t free!

“Business Owners, Physicians, Social Media Influencers, and others ought to at least consider transferring excess cash or investments to a South Dakota irrevocable trust as part of their comprehensive California estate plan with various objectives . . . while the coast is clear and creditors and divorce are nowhere on the horizon.”

Potential Advantages of a South Dakota Domestic Asset Protection Trust

No State Income Tax

South Dakota does not impose state-level income tax. This means that, in general, income-producing assets, such as a brokerage account, owned by a South Dakota Non-Grantor Domestic Asset Protection Trust (DAPT), can grow income-tax free at the state level. The potential income-tax planning strategies that a South Dakota-resident DAPT can afford often have the potential of being very advantageous (though a bespoke estate plan is crucial). In contrast, California can impose a potential capital gains tax rate of 13% or higher on irrevocable non-grantor trusts with minimal income, and because California does not allow incomplete gift non-grantor trusts, South Dakota's trust laws may be appealing for California residents.

The residencies of the settlor, trustee, and beneficiaries must be considered, and whether the irrevocable trust will be grantor or non-grantor for income tax purposes, and complete or incomplete for estate tax purposes, must also be explored and considered in depth.

If state-level income-tax savings is a goal, it will be critical to make the South Dakota DAPT a non-grantor trust and a resident of South Dakota, and not California (or any other state). As such, in most instances, there would be little, if any, income tax advantages to transferring real property not situated in South Dakota to a South Dakota DAPT (except for community property cost basis purposes).

The irrevocable non-grantor trust is the South Dakota resident, not you.

Total Privacy

South Dakota trust statues offer what is perhaps the most extensive, while flexible, privacy protection framework in the nation, and “quiet trusts” are permitted. Not only does South Dakota trust law allow the trust to be drafted in a manner that restricts or even eliminates the beneficiaries’ rights to any information at all about the trust (and can authorize the trustee or certain other individuals to modify those rights, even after the settlor’s death) but also contains an absolute seal that prohibits a court from releasing trust information in a trust proceeding . . . in perpetuity. Even if you are not a Hollywood celebrity, if total, absolute, perpetual privacy is your desire, then South Dakota’s privacy environment alone should place South Dakota at the top of your list.

Creditor Protection

A self-settled trust or Domestic Asset Protection Trust (DAPT) in South Dakota can be an essential part of a comprehensive California estate plan. It offers potential creditor protection, allowing the settlor to remain a discretionary beneficiary and retain some control in accordance with the settlor’s tax objectives, while often shielding assets from divorce and lawsuits (or at least incentivizing settlement).

To avoid fraudulent conveyance clawback issues, ensure transfers are legitimate; the lookback period is two years, or six months for known creditors having notice of the transfer, though bankruptcy can extend this. Common lawsuits, such as those from car accidents, defamation, breach of contract, or malpractice, pose risks, and using California state exemption statutes for automatic creditor protection—like homestead equity—can be beneficial.

Remember that asset protection planning is proactive planning—before storm clouds such as preexisting alimony or child support obligations or creditor claims are on the horizon. Understanding how to maintain control and avoid “badges of fraud” can help ease concerns about asset protection.

No Rule Against Perpetuities

As South Dakota has abrogated the rule against perpetuities (a rule that otherwise requires that trust property vest in the beneficiaries and terminate at a certain time), a South Dakota irrevocable trust such as a DAPT need not ever terminate. The trust property can grow in the dynasty trust in perpetuity, escaping federal estate tax from the beneficiaries’ generational estates.

Administrative Flexibility to Decant, Modify, and Reform Trusts

Unforeseen circumstances, mistakes, or changed law can cause the terms of the trust to later misalign with the settlor’s earlier intent or otherwise frustrate the purpose of the trust.  Two common tools that estate planners use to “fix” these problems are decanting (the transfer of assets from an old trust to another, new trust) and reformation/modification (judicial or nonjudicial, depending on state law).  South Dakota’s trust statutes are progressive and flexible, an important benefit in a world where family dynamics, tax laws, and other variables are always changing.  For instance, South Dakota permits decanting without notice being given to beneficiaries, and to change beneficial interests, among other flexible changes.

Broad Trust Protector Powers (Directed Trust Statutes)

As mentioned elsewhere on this page, to avail oneself of South Dakota’s putative, favorable tax and trust environment, the trust must be sitused in (governed by) South Dakota trust law and administered in South Dakota. This means that a South Dakota resident trustee must control and administer the trust. But imagine being able to divide the trustee’s responsibilities in a way that would allow the trust to have an independent, South Dakota corporate trustee (such as a trust company) who handles administrative responsibilities like distributions and other administrative matters, while utilizing a trust protector or other committee to choose financial and investment advisors (who do not need to be residents of South Dakota) and time and direct distributions. This is what is called a directed trust. While a few states, including California, have adopted the Uniform Directed Trust Act, South Dakota has not (nor has South Dakota adopted the Uniform Trust Code); its directed trust statute is much broader and more flexible.

South Dakota also authorizes a trust protector broad laundry list of powers to amend, modify, direct, terminate, etc. a trust.

Special Purpose Entities Permissible

Special purpose entities (SPEs) under South Dakota trust law can offer enhanced asset protection and flexibility for business owners and investors. These entities can separate assets from personal liability, shielding the trust protector or investment committee from creditors and lawsuits (and, through the SPE, these individuals may be able to obtain D&O and E&O insurance). In addition, SPEs can streamline management and facilitate efficient estate planning, allowing for tailored investment strategies while maintaining privacy. Overall, they provide a robust framework for safeguarding wealth and optimizing financial outcomes.

Note that, in South Dakota, while an SPE must register with the South Dakota Division of Banking, SPEs are unregulated and are not trust companies themselves (they work with a South Dakota trust company).

Still feel as though you have “range anxiety,” as though you were driving an electric car for the first time? California estate planning attorney Ryan J. Casson can help you understand irrevocable planning and overcome the psychological component of “giving up control.”